More in store as bidders walk the aisles

The bid approach for Sainsbury shows that hardly any target is too big for private equity groups. It sent the supermarket group's market value soaring by £1.1bn to £8.7bn, and set the tide of bids funded by cheap debt flowing again after a short New Year break.

It also shows that private buyers think nothing of paying far beyond the stock market price for companies with good assets and strong cash flow.

We may be moving into a depressing era when the property companies own are as important as their underlying business. But this offers good gains for investors who can pick the right stocks.

None of this means that Sainsbury is sure to be swallowed. The approach is a 'pantomime horse' combining three private equity firms - CVC, KKR and Blackstone. Such beasts find footwork tricky, and can easily fall foul of the competition watchdogs.

Even if some Sainsbury family members are selling chunks of shares, this does not mean all of them will sell the lot. And any bidder trying to sell off parcels of stores would have to spend months winning clearance from the regulators.

That prompted some retail analysts to rate the shares a sell after the approach, believing it better to take profits after they rose 61p to 507p, where they are up 90% in two years.

Richard Ratner at Seymour Pierce, a formidable retail expert, thinks: 'The VCs (venture capitalists) may look at it, but we do not believe that they will necessarily bid.' But I would not sell when bidders are circling. A clever analysis by Steve Davies at Numis Securities five days ago suggested a private bidder could pay 600p (£10.3bn) and still make money.

Sainsbury owns many of its own stores. Last March it revalued 127 of them, in the books at £2.3bn, at £3.55bn, a 54% uplift.

Applying that to its freehold and long lease portfolio, in the books at £5bn, suggests it is worth £7.5bn. If a recent sale by Tesco on rental yield of 4.5% is a guide, the Sainsbury portfolio could be worth even more - £8.5bn.

Writing when the shares were 433p and the market value £7.4bn (£9.1bn including debt), Davies argued that if the property is worth £7.5bn, the retail operations of the group were valued at just £1.6bn.

Even paying market rents for the properties, the stores should make operating profits of £725m in the year to March 2008. So a bidder would be paying just 2.2 times these profits.

Now that the shares have risen, the price would rise to 4.1 times - still cheap. Numis set a target price of 600p for the shares.

Where else might bidders pounce? Morrison is the rival supermarket with the most attractive properties. The older pub chains also have huge property potential. The arrival of tax-sheltered Real Estate Investment Trusts (Reits) offers them the chance to realise this, though there is one big snag; handing over their properties into a Reit means they lose control of them.

Two months ago Nigel Parson at Evolution Securities highlighted the pub groups' Reit potential and said: 'When the next round of bids arrive, pubcos will surrender or convert into a Reit as part of their defence.'

He picked Greene King and Wolverhampton & Dudley (now renamed Marston's) as top bid targets. He also liked Punch Taverns, Mitchells & Butlers, and Enterprise Inns. He said: 'Private equity groups want asset-intense, stable, low-tech cash generative businesses. The big five pubcos tick all the boxes.' Since then, value hunter Robert Tchenguiz has declared a stake in Mitchells, which suggests Parson is on the right tracks.

The analyst set out a valuation of Greene King (now 1124p) at 1525p, Punch (now 1211p) at 1535p, Marston's (now 443¾p) at 446p and Enterprise (now 665½p) at 1496p. The greatest upside appears to be at Enterprise.

It may only take one bid in each sector to galvanise management to realise the value of their property.

That is good news for shareholders. Follow the assets.

• Tata's victory in the auction for steelmaker Corus, at 608p cash, is a happy end for those who took our tip in 2005 at 40¾p. The outcome is not as good as it looks; after Corus consolidated its shares, the tip price effectively became 203¾p. But you should still have almost trebled your money. Let us hope it works out well for Corus employees and pensioners.